WMG (Toughening) Ltd., Re [2001] IEHC 65 (6th April, 2001)

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1. Mr. Oliver Brady, the Petitioner herein, says he is owed £138,000 by WMG (Toughening) Limited (the Company) to whom he lent that sum on the 9th July, 1998. While it appears that the loan was, in fact, from Elgrove Limited, there is no issue that he was, at the time of the presentation of the petition, the owner of all the shares therein.

4. On the 13th April, 2000 he petitioned for the winding up of the Company on the ground that the Company was insolvent and unable to pay its debts. On the 16th June he filed a verifying Affidavit. On the 27th and 28th June he advertised the petition in the national newspapers and on the 5th July in Iris Oifigiuil.

6. The issues raised in this petition extend from the service of the statutory demand by the Petitioner on the Company, the solvency of the Company at the date of the presentation of the petition, to the control and management of the Group and the Company itself.

7. In addition, issues arise regarding the relationship between the Company and the Group after the controlling shares in the Group was sold by Mr. James Barber, who resists the application for the winding up of the Company, to Mr. Brady, the Petitioner herein, on the 9th July, 1998.

9. He appears to have done so in order to promote the interests of the Business Expansion Scheme Shareholders, many of whom were the clients of his accountancy practice.

10. Certain disputes arose between the date of the agreement of the 9th July, 1998 and the calling of an EGM which was held on the 5th May, 2000, almost two years thereafter which resolved a change in the board of directors.

11. The Petitioner was chairman of the group. One of the group’s subsidiaries was the sole customer of the Company. The Petitioner was never a Director of the Company.

12. Mr. Don O'Gorman was Managing Director of the Company having worked previously for the group as had Mr. Brugha who was also Director of the Company. In addition, Mr. Brian Neville, Financial Controller and Mr. James Punch, Production Manager had previously been employed by the group.

13. In fact the difference between the Company, which had no premises of its own and the group appeared to have been in name only. The Company was formed for the purposes of attracting grant aid and BES investors.

14. The Company was, from its incorporation on the 11th February, 1995 funded by a Forbairt grant in the sum of £125,000, by the loan from Elgrove Limited of £138,000 and from two tranches of BES funds of £55,000 on the 31st July, 1995 and £157,000 on the 28th February, 1996.

15. In order to understand events prior to and subsequent to the agreement for sale of shares on the 9th July, 1998 it might be useful to refer to the chronology appended hereto.

17. The multiplicity of Affidavits raises some conflict as to facts. What is abundantly clear, and indeed would seem to be common case, is that both before and after the change in ownership, the Company was set up for the purpose of financing, through Grant Aid and through BES funding, an operation which was entirely dependent on a subsidiary of the Group as its sole customer. It did not have separate premises nor, indeed, at all material times, a separate trading bank account. It was perhaps inevitable that its management and final accounts depended on what overheads were ascribed to it and, to an extent, on pricing policy. It is also perhaps inevidible that there should emerge some disputes regarding the accounts prepared by the Directors to its auditors.

18. It is curious that neither the Petitioner nor Mr. Barber were ever Directors of the Company up to the time of the agreement of the 9th July, 1998. Mr. Barber, was, of course, the controlling shareholder before that date as was the Petitioner after that date. It also significant that all but two of the BES shareholders - Mr. O’Gorman, the Managing Director, and Mr. James Punch, the Production Manager, were clients of Mr. Barber’s accountancy practice.

19. The agreement of the 21st June, 1998 between Mr. Barber and Mr. O’Gorman provided, inter alia , for the BES Shareholders to be redeemed on their due dates. The Petitioner was not a party to that agreement.

20. Neither is the Petitioner a party to the agreement to extend the closing date made the 25th June, 1998. In the event the Petitioner took over as purchaser.

We the Directors of WMG (Toughening) Limited (WMGT) and WMG Group Limited (WMG) and being the shareholders of WMG are putting in place a sinking fund in WMGT to ensure that funds shall be available to comply with the redemption of the BES investors at the due times such fund shall continue to be funded as follows:

22. No sinking fund was put in place. The Company was not sufficiently profitable. The new Directors had agreed to allocate certain group costs to the Company. Mr. Barber had agreed to a move from the previous premises to new premises. The Directors of the Company decided to allocate a substantial proportion of the these costs to the Company.

23. The Directors, on advice from a Mr. Murphy, an insurance broker, also decided to allocate a substantial proportion of the premium to the Company retrospectively.

24. The auditors report in relation to year ending 31st December, 1997 was unqualified. It shows a turnover of £530,000.00 as compared to £389,000.00 for the previous year. Operating profit was down from under £20,000.00 to over £5,000.00. Under debtors, the amounts falling due within one year was £334,000.00 (£388,000.00) which is stated to be due from a subsidiary of the Group.

25. The Draft report and financial statement for year ending 1999 shows a small increase in turnover at £759,000 from the previous year which is more than offset by factory and establishment costs leaving an operating loss for 1998 and 1999. The Auditors qualified the 1998 Report and the 1999 Report.

26. In relation to allocation of costs to the Company the Directors were satisfied that the allocation has been carried out in an appropriate manner and correctly reflects expenses relating to the trade of (the Company). In particular the draft stated, in relation to insurance, that the Directors confirmed that the intercompany cross charge was computed on a realistic commercial basis and reflected the Company’s correct share of the Group charge.

27. Mr. Barber, who had become a Director of the Company after the sale of his shares in the Group on the 9th July, 1998, disagreed with the allocation of these cost to the Company. He refused to sign the draft accounts.

28. The 1999 auditors report followed the change in the Board of Directors following on the Extraordinary General Meeting, of 5th May 2000, also qualified the accounts in relation to a claim made by the Company against the Petitioner in the sum of £911,000.00, being £545,000.00 in respect of under invoicing and £134,000.00 in relation to the moving cost and the balance in relation to the allocation of insurance costs. The net assets of the company appear to be £112,000. The value of the BES shares would appear to be 18p.

29. In respect to what Mr. Barber call the improper denial of revenues which he estimates amount to £545,337.00, Mr. O’Gorman in his Affidavit refers to spreadsheet which show that the Company has, in fact, been overpaid to a small extent rather than being denied revenues. While further analysis may, undoubtedly, resolve the issue, there remains, on Affidavit, a conflict which would not appear to have been raised until after the petition was presented. It is clear, however, that the other matters, those relating to insurance allocation and moving costs, were raised and objected to by Mr. Barber who alleged that they were contrary to the financial parameters agreed by the Petitioner and the then Directors of the Company on the 9th July, 1998.

30. The conflicts apparent in the Affidavits, the auditors reports do not resolve. Can the discretion of Company Directors’ be fettered by an agreement to provide for a sinking fund to repay BES investors. Such as entered into between Mr. O’Gorman and Mr. Brady. It is clear that Mr. Brady was not a Director of the Company. Mr. O’Gorman was Managing Director and, as such can be taken to bind the Company.

32. With regard to service an objection is made that paragraph 6 of the petition states that on the 13th April, 2000 the Petitioner served on the Company by faxing the same to the Registered Office.

33. Section 214 provides that a Company would be deemed to be unable to pay its debts if, inter alia , a Creditor.... has served on the Company, by leaving at the Registered Office of the Company, a demand under his hand requiring the Company to pay the debt so due ....

34. Mr. Meenan, SC on behalf of the Petitioner, submitted that the Company is insolvent, that it owes £138,000.00 to the Petitioner, that that debt together with the £125,000.00 owed to Forbairt is clearly in excess of the £112,000.00 which would appear to be net assets of the Company at present.

“Although the fact that the Company is insolvent is not, of itself, a ground for allowing a petition to proceed which is clearly an abuse in process, it remains an important factor in every case where the Court is exercising its equitable discretion in granting or withholding injunctive relief. A Court must approach the position of such a Company with the interest of the creditors particularly in mind. As Street C.J. put it in Kinsella -v- Russell Kinsella PTY Limited (in liquidation) (1986) 4 NSWLR 722:

In an insolvent Company the proprietary interests of the Shareholders entitled them a general body to be regarded as the Company when questions of the duty of Directors arise. If, as a general body, they authorise or ratify a particular action of the Directors, there can be no challenge to the validity of what the Directors have done. But where a Company is insolvent the interest of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the Shareholders and Directors to deal with the Company's assets. It is in a practical sense their assets and not the Shareholders’ assets that, through the medium of a Company, are under the management of the Directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

In Re: a Company (1997) 1 BCLC 639 at 649 and 652 it was emphasised that there was no rule of practice that a petition would be struck out or dismissed merely because the Company alleged that the debt was disputed.

.... I do not accept that the Court is bound to hold that there is a need for a trial in circumstances in which, on a proper understanding of the documents, the evidence asserted in the Affidavits on one side is simply incredible.”

37. References made, in that case, to the Banque de Paris ( (1984) 1 Lloyd’s report 21): raise a question whether there is a fair or reasonable probability of the Defendant having a real or bona fide defence..... If it is not then there is no fair or reasonable probability of him setting up a defence.

“This was a case in which the dispute now said to exist is not founded on any substantial grounds. Rather, this is one of those cases in which, as Oliver L.J. observed in Re: Claybridge Shipping Company S.A., an unwilling debtor is raising a cloud of objections on Affidavit in order to claim that a dispute of fact exists which cannot be determined without cross examination so that the petition cannot be allowed to proceed.... One of the things that the law can do in a case of this nature is to allow the petition to proceed.”

39. Mr. Meenan says that the claim against the Petitioner is personal. The only claim is one of conspiracy which requires proof as a matter of probability to enter into an agreement with another to wrongfully under invoice or overcharge. It is akin to fraud. However, there are no facts nor any inference of conspiracy and accordingly, in his submission, the claim, is not bona fide or of substance.

40. Mr. Meenan asked the Court to consider the Affidavits of Mr. O’Gorman, Mr. Neville and Mr. Brugha and the audited accounts and, in particular the exercise in Mr. Neville’s Affidavit which includes a page by page examination of work orders, production records, meterage and damage and concludes that money is actually owed by the Company.

41. The Court should also consider, in his submission, the delay in pursuing the claim dated the 4th July, 2000. In any event an order allowing petition will not determine the claim, which the liquidator can pursue.

42. The Court should consider that the Company has ceased to trade and that there is no indication from the Director’s that its going to trade in the future. Its plant and machinery are sold, its employees have been made redundant and it is has no premises.

43. It is just and equitable that the company be wound up. The grounding facts are not in dispute, the entire substratum of the Company has disappeared and the provisions of the German Date Coffee Company (1882) CHD 169 and Re: Kitson (1946) 1 All ER 435 apply.

44. Mr. O’Neill SC on behalf of the Company submits the essential issue to be determined by the Court is whether there is a cross claim such as would render it improper to allow the winding up. Section 213 (3) (e) of the Companies Act, 1963 empower the Court to grant an order where “the Company is unable to pay its debts”.

45. A petition to wind up a Company is not an appropriate mechanism for the collection of that which is bona fide disputed. That principle, explained by Buckley L. J. in Stonegate Limited -v- Gregory (1980) 1 All ER 241, 243, approved by O’Hanlon J. in Re: Page Boy Couriers (1983) ILRM 510, 512 as follows:

“If the Company in good faith and on substantial grounds disputes any liability in respect of the alleged debt, the petition will be dismissed, or if the matter is brought before the Court before the petition is issued its presentation will in normal circumstances be restrained. This is because a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed.”

46. The same principle applies where the Company has a cross claim against a Petitioner: See Malayan Plant (PT) Limited -v- Moscow Narodny Bank Limited (1980) 2 MLJ 53, 55, as follows:

47. Mr O’ Neill urges the Court to have regard to the financial parameters agreement and the breach of that agreement in reference to that attribution of insurance and moving costs. Notwithstanding the terms of that agreement the Petitioner notified that the BES Shareholders that shares were worth 18p and offered to buy them for a sum of 50p per share. It is, in his submission, the Petitioners effort to extricate himself from the obligation to duly redeem the BES investment, that lies at the core of the proceedings.

48. There is no doubt, in his submission, that the Petitioner did embroil himself in the affairs of the Company and that there was a breach of contract procured by the actions of the Petitioner. These, in his submission, are clearly matters of evidence for the hearing of the action taken by the Company against the Petitioner but cannot undermine the prima facie case disclosed by the undisputed facts.

49. In relation to the agreement of the 9th July, 1998 it is urged that it is an undertaking signed by both the Petitioner and Mr. O’Gorman personally and not on behalf of the Company and, accordingly, they are personally liable for a breach of its terms. References made to Shinkwin -v- QuinCon Limited (unreported Supreme Court 21st November, 2000) in relation to a personal injuries action, that a Director Shareholder “had placed himself by his own actions in such a relationship to the Plaintiff as to call upon himself the obligation to exercise care should apply.

50. The claim cannot be pursued by a liquidator. If the Company has a claim it would, in the words of Harman J. in L. H. F. Woods Limited (1970) Ch. 27, be better managed by the Directors than by any liquidator.

51. While there maybe a dispute as to whether the notice under Section 214 was both faxed and posted to the Company, or merely faxed, there is no question in the Company’s submission that it was not delivered to the Company’s Registered Office by leaving the notice at the Registered Office. Re: A Company (1985) BCLC 37 at 42-43 (Nourse J.) stated:-

“Although I understand that it is sometimes the practice of the Company’s Court to act on the basis of a statutory demand which has been sent through the post, it seems to me that once the point taken by Counsel for the Company has been taken, it seems to be a good one. (The relevant Section) shows clearly that sending it by post is not leaving it at the Registered Office within, the meaning of that section. It may be that the provisions of the Company’s Act have not yet fully caught up with modern conditions and that there would be a case for allowing a statutory demand be sent through the post, or indeed to be sent by telex. On the other hand a statutory demand is a solemn document with potentially serious consequences. I can well understand that the legislator might have consciously intended that the service of a document of that character should be carried out in much the same way as the service of a winding up petition, which cannot be sent through the post and certainly cannot be sent by way of the telex machine.”

52. Mr. O’Neill S.C. also objected to the Petitioner not being the legal owner of the debt. An equitable owner, he submitted, is not entitled to present a petition for the winding up. He referred the Court to in Re: Steelring Limited (1921) Ch. D.349.

54. It does appear to be the case that the service of a formal document is required to be done with exactitude. I would adopt the reasons given by Nourse J in Re a Company (1995) BCLC 37 at 41/42 in this regard.

55. If I am wrong in this, admittedly, technical interpretation I should then pass to the other issues. The second of these is the solvency of the Company at the date of the presentation of the petition. This necessarily has to be considered in the context of what appears to be an artificial relationship between the group and the Company. In this respect the control of management of the group and the Company necessarily comes into focus.

56. After the sale of the shares by Mr. Barber and notwithstanding that Mr. Barber then became a Director, it seems to me that the interests of the group predominated to the detriment of the funders of the Company. This, of course, included the investment made by the Petitioner’s Company.

58. Of course, the decline in the profitability of the Company to an operating loss for 1998 and 1999 was due to some extent by the allocation of moving costs and insurance costs from the group as theretofore to the Company. The allegation of under invoicing in the sum of £545,000 which Mr. Barber categorises as “improper denial of revenues” is disputed and has not been resolved by the auditors who qualify the accounts of 1998 and 1999.

59. While there is no doubt in my mind that there was a high risk involved in lending and investing in a company which appears to have been set up on an artificial basis and was entirely dependent on the group or its subsidiary or subsidiaries, the financial parameters agreement would seem to have been intended by Mr. Barber to substitute for his controlling share holding prior to the sale of the shares to the Petitioner.

60. The letter regarding those financial parameters was signed by Mr. O’Gorman as Managing Director and, accordingly, binds the Company. It is, of course, subject to the qualification that the Company be sufficiently profitable. However the statement: “we shall be leaving the current financial parameters in place as heretofore” would not appear to have been adhered to.

61. That letter was, of course, also signed by the Petitioner herein. Though he was not a Director of the Company he was, of course, chairman of the group. As such he was in a position to ensure that these “financial parameters” would remain in place.

62. While there is a certain vagueness about the term and a certain ambiguity about the evidence given in relation thereto, it does seem to me that a Court of Equity must endeavour to give effect and efficacy to the intention of the Parties at the time that letter was written.

63. Moreover, the Company does have grounds to dispute its liability. The Petitioner in Truck & Machinery Sales Limited -v- Marubeni & Komatsu Limited (1996) 1IR 12 at 24 Keane J (as he was then was) stated:

“It is clear that where a Company in good faith and on substantial grounds disputes any liability in respect of the alleged debt, the petition would be dismissed, or if the matter is brought before the Court before the petition is issued, its presentation will in normal circumstances be restrained. This is on the ground that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which has bona fide disputed.”

In Malayan Plant (PT) Limited -v- Moscow Narodny Bank Limited (1980), already referred to, it was held that there was no distinction in principle between a cross claim of substance and a serious dispute regarding the indebtedness imputed against a a company.

64. This does seem to me to be a case where there is a doubt about the claim or cross claim and one in which the Court should proceed cautiously. In addition, given the dominance of the group with regard to the company it seems to me that a chairman and director of the group does owe a duty of care to a subsidiary company especially where there is an allegation that the insolvency has been caused or contributed to by the group of which the Petitioner is a Director. In the exercise of its equitable discretion the Court will restrain the presentation of such a petition. As the petition has already been served the Court Order should be that it be dismissed. The Court is not satisfied that the petition is being presented for the benefit of all of the members and creditors.

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You are here: BAILII >> Databases >> High Court of Ireland Decisions >> WMG (Toughening) Ltd., Re [2001] IEHC 65 (6th April, 2001) URL: http://www.bailii.org/ie/cases/IEHC/2001/65.html Cite as: [2001] IEHC 65, [2001] 3 IR 113

High Court of Ireland Decisions

WMG (Toughening) Ltd., Re [2001] IEHC 65 (6th April, 2001)